Is Japan Starting a Sovereign Wealth Fund?

October 15, 2013 Leave a comment

Is Japan Starting a Sovereign Wealth Fund?

Years of currency manipulation by Japan’s Ministry of Finance has left it with $1.27 trillion in foreign exchange reserves, most of which are invested in low-yielding U.S. Treasury bonds. Following an account in Japan’s Nikkei newspaper, Bloomberg News reported that the ministry is planning to outsource management of some of this money. Details about the plan are thin. Still, it could mark the first step toward the creation of a Japanese sovereign wealth fund that invests for profit.Countries that buy dollars and euros to suppress the value of their own currencies aren’t trying to make money from their asset portfolios. Rather, they believe that their purchases of foreign exchange are worthwhile because they increase the competitiveness of their export industries. (Some governments also hoard foreign currency as a hedge against the foreign borrowings of their local businesses, although this doesn’t apply to Japan.) This can create opportunities for savvy currency traders to make money off the “uneconomic” decisions of certain central banks.

Sovereign wealth funds are different. Big oil producers that have underdeveloped domestic industries will invest abroad in an effort to secure needed resources if (or when) their oil runs out. That’s why the biggest sovereign funds are operated by Norway, Saudi Arabia, Kuwait and Abu Dhabi, although Singapore, China and Canada also have large funds. (If the Social Security trust fund were managed to maximize returns rather than hedge its fixed liabilities, it would be the world’s largest sovereign wealth fund by a wide margin.)

Sovereign wealth funds often make direct investments in companies, infrastructure projects, natural resources and real estate. While every sovereign wealth fund is different, many of them follow the Yale endowment model by making significant allocations to illiquid investments and hedge funds. Their track record is mixed but some of them have done very well for their citizens.

What “outsourcing” means in the context of Japan’s currency portfolio isn’t clear. Perhaps it will let professional traders make decisions about whether to hold Treasury bonds or mortgage-backed securities guaranteed by the U.S. government. That wouldn’t be very interesting compared with what some other funds are doing, but it could mark the beginning of an intellectual transition at Japan’s Ministry of Finance. If so, expect hedge-fund managers and private-equity titans to start flying to Tokyo looking for investment mandates.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)

Filed under Macro Trends

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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